Do I need a pension?
Having a pension only seems useful when you actually reach pension age, but planning for one has to start when you’re young. So what IS a pension and how do you go about getting one?
What exactly is a pension?
Pensions are a way of saving for retirement that means you lock your money away until you’re at least 55. Everyone who has paid National Insurance can get a state pension, but it’s not enough to live off, so it makes sense to start your own pension as early as you can.
Surely I’m too young for this…
The earlier you start a pension scheme, the more interest you’ll earn as your pension grows – known as compound growth. So for a secure retirement, the earlier you think about a pension, the better.
Ok, but why are pensions worth it?
Jobs now have to offer auto-enrolment pension schemes where your employer contributes on top of what you contribute to the scheme monthly. For example, you pay 1% of your monthly salary and your employer adds 4%. The auto-enrolment means you don’t even have to think about this kind of saving. It’s automatically kick-started and going on in the background. You can, however, opt-out if you want – speak to your work’s human resources (HR) person.
Pensions are tax-friendly
Pension schemes are tax-friendly. With workplace and personal pensions, your pension contribution will be taken before you’re taxed, meaning more money goes into your pension pot.
Your pension pot is also never taxed when it’s untouched. Once you start taking money from it, you won’t be taxed on the first 25% but you’ll pay income tax on the remaining 75%.
Pensions are locked away until you need them
Putting money in a pension stops you getting your hands on the money until you’re at least 55, so you don’t fritter it away on holidays. That said, if you desperately need money, having it stuck in a pension can prove frustrating.
How much do I need to put in a pension?
As a guide, a minimum of 10% of your salary needs to be saved each month over your working career. If you are putting less than this away, you need to top up later down the line.
What kind of pension schemes are there?
There are quite a few options but these are the most common:
This is the standard government pension scheme that you can start claiming when you reach State Pension age. The new full State Pension, introduced in April 2016, is £155.65 a week if you’ve made 35 years’ worth of National Insurance contributions.
You don’t have to claim your State Pension when you reach the qualifying age. If you don’t need it, and defer, then you get extra money when you finally do claim it.
As mentioned earlier, employers now have to offer an auto-enrolment pension scheme to employees, where they’ll contribute a certain percentage for every 1% minimum employee contribution a month. This is now an opt-out policy, rather than opt-in, so if you really don’t want to take part then you won’t be forced to. But it’s always worth finding out about the benefits before you make a decision.
Also known as ‘defined contribution (DC)’, personal (or private) pensions are ones you seek out yourself. They’re great if you’re not working, self-employed, or just want to add to your pension pot. They’re often provided through insurance companies, banks, and building societies, so it’s definitely worth doing your research to find the best deals.
So once I retire, I’m set until I die?
No. When it comes to managing your money it’s often said that you should spread the risk around. This means not relying on one source of income in your retirement, but instead trying to build up several separate investments. For example, aiming to buy property and saving money into an ISA as well as starting a pension.
It’s also worth considering a Lifetime ISA. This type of ISA will launch in April 2017 and will mean you can save up to £4,000 a year. However much you save will then get you a 25% bonus from the government at the end of each tax year, and then you’ll get interest added too! The only catch is that you can only use the money to buy your first home (worth under £450,000) or once you retire over 60. For more information, have a read of MoneySavingExpert.com’s very handy article.
How can I get this pension ball rolling?
Start with an independent financial adviser. The consultation should be free, and a good adviser will help you work out the best options for you, taking in your age, lifestyle and attitude to money.